Self-Employed Bad Credit
Your home may be repossessed if you do not keep up repayments on your mortgage.
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Self-Employed Bad Credit
David Sharpstone talks us through getting a mortgage if you are self-employed with bad credit.
What are the main challenges self-employed individuals with bad credit face in securing a mortgage?
We can break this down into three challenges. First is deposit – because if you’ve got bad credit you can expect to be putting down a larger deposit on a property. A typical starting point is a 15 % deposit looking at the market at the moment.
The next challenge is going to be rate. It sounds brutal, but if you’ve previously got yourself into a financial pickle, you’re going to be paying a much higher rate than somebody with a clean credit score. Mortgage lenders have to account for the additional risk, so they’re going to charge you more.
That rate will then have an impact on affordability. If your mortgage payment is going to potentially be higher than for someone without bad credit, you might have to borrow a bit less.
Then you have to meet the mortgage lenders’ individual criteria. Some mortgage lenders specialise in people with less than perfect credit history, but they have set criteria. It’s usually to do with the specifics on your credit report – whether it’s defaults, County Court Judgments, IVAs, how recent the issue was and the size of it. It can even come down to the creditor. Sometimes lenders are a little bit more lenient if the debt is with mobile phone companies.
So these are the challenges and hurdles that as brokers we have to address, working with clients and the lenders to try and secure a mortgage deal.
How can self-employed individuals with bad credit improve their chances of getting a mortgage?
If you’re self-employed and you’ve got bad credit, the first thing to do is make sure your company is looking strong on paper, whether you’re a sole trader or a company director.
If you’re saying to the mortgage lender that you’re earning £100,000 a year, whether that’s personal income or profit in the business, they may ask for your bank statements. If those don’t show that level of income coming into the business, that will be a challenge from the start.
So make sure that the business is looking healthy and you’re approaching the lender at the right time. It also helps to have a good accountant on your side. It needs to be an accountant with qualifications, because an unqualified accountant is not fully recognised by a mortgage lender. An accredited accountant can prove justifications about what’s going on in the business which will support your application.
It’s also fairly common to withdraw money from the business to use as a property deposit. Mortgage lenders may worry that taking all the money out of the business could make it less sustainable should times get tough. Having an accountant on side to help with that can give confidence to the mortgage lender – it can really help.
What documentation do self-employed individuals with bad credit need when applying for a mortgage?
Whether it’s bad credit or not, typical documents for the self-employed include self-assessments for one or two years, depending on how long you’ve been trading. It could be company accounts, business bank statements, personal bank statements and evidence of deposit. These are all very standard things irrespective of your credit history.
If you’ve got bad credit a very useful additional document is a written explanation to the mortgage lender of what was happening at that time in your life. You might have had a bereavement in the family, or you might have had to take time out of work to care for a loved one. They just want to know what was going on at the time the bad credit event happened.
Seeing that in writing from an applicant can give peace of mind to a mortgage lender. They ideally want to see it was one-off life event rather than an ongoing pattern of behaviour.
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Can self-employed individuals with bad credit get a mortgage without a large deposit?
When you say bad credit I’m going to assume we’re talking about defaults or County Court Judgments, in which case you’re going to need a 15% deposit. You might get away with 10%. We’re recording this in July 2023 but people might be listening two or three years after we’ve recorded. The market could be very different. But at the moment I would say 15%.
You might have been able to do it with 5% in a stronger market. It’s very dynamic at the moment.
What interest rates can self-employed individuals with bad credit expect to pay on a mortgage?
I can’t give specific interest rates as anything I say now might not be true tomorrow – the market is changing so quickly.
But with mortgage lenders that cater for bad credit mortgages, you will broadly be paying 1% to 2% higher than someone with a clean credit score.
What role does a credit score play in getting a mortgage as a self-employed borrower with bad credit?
Generally speaking, if you’ve got bad credit, your score is going to be low. A specialist lender in this area will be expecting that. They’re more interested in the hard facts on the credit report rather than the score itself.
Do any mortgage lenders specialise in lending to self-employed individuals with bad credit?
If you’re in your 40s and have had a mortgage before, these are what might have historically been called ‘subprime’ lenders. I’m not sure that’s a term we use these days but that’s what I still call them in my head.
They’re not your typical high street banks, but they do cater for people with bad credit or less than perfect credit scores. Their risk profile is designed to lend to these people.
What steps can self-employed individuals with bad credit take if they have been declined for a mortgage?
I would try to find out why it was declined. Sometimes it’s really obvious. If a client has a recent County Court Judgement and they have been declined by Halifax, Santander or Nationwide, a big high street lender, that speaks for itself. Usually the lender would just say it doesn’t meet their criteria.
The next step would be speaking to a mortgage broker. A mortgage broker that specialises in adverse credit counts for so much in these situations. Knowing where to place these cases makes a huge difference.
There’s no harm in asking a broker how long they’ve been helping people with bad credit. A mortgage is a big purchase. You’ll have it for potentially the next 25 to 35 years – you need to make sure you’re getting the right deal.
How long does it take for self-employed individuals with bad credit to get a mortgage offer?
From the moment we submit a mortgage application and we’ve got all the upfront paperwork, it will take somewhere between eight to ten weeks. It sounds like a long time but with lending for clients with bad credit, the underwriting process is more arduous. Lenders are going to ask a lot more questions.
In a straightforward case, a high street bank might only require a couple of bank statements and a couple of payslips and be done in 10 to 15 working days. In this situation, there are more checks both on the self-employed side of things but also on your credit history. So allow 10 to 12 weeks – often it does happen quicker, but it’s better to manage your expectations.
Your home may be repossessed if you do not keep up with your mortgage repayments.